The cost of mortgages has fallen towards 40-year lows after the Bank of England stunned economists by cutting interest rates.

The Bank's base lending rate was cut from 5.25% to 5% - its lowest level since mid-1999 and joint lowest since November 1977.

Mortgage rates

Halifax - down from 6.25% to 6%

Virgin One - down from 6.45% to 6.2%

Nationwide - down from 5.99% to 5.74%

HSBC - down from 6% to 5.75%

The news sent leading UK shares nearly 2% higher, although stocks later fell back to close up 0.67%.

The cut is the fourth this year and follows pressure from Britain's manufacturers, which have been hit by a slowdown in the world economy.

While the move is good news for homeowners, who will see mortgage bills cut, it is not such good news for savers who will see the returns on their money decline.

The cut will also do little to calm fears that the housing market is overheating, with property price inflation running at 11%, according to mortgage lender Nationwide.

The UK's largest mortgage lender, Halifax, reacted to the Bank's decision by cutting its standard variable mortgage to 6%, the lowest it has been since February 1963.

HSBC, Virgin One and Cheltenham and Gloucester have also announced rate cuts, while Nationwide, Royal Bank of Scotland and Alliance & Leicester all said they were reviewing their mortgage rates.

The Council for Mortgage Lenders said that lower interest rates and increasing competition meant mortgage rates were at their lowest for 40 years.

Jobs threat

Reacting to the interest rate cut, Ian Fletcher, chief economist at the British Chambers of Commerce said: "This will help cushion the UK impact of the global slowdown, and steady a few nerves in business.

Ian Fletcher: "Cut will help cushion slowdown"

"The Bank of England has sent a clear signal that it is not prepared to allow the global slowdown strike any deeper into our domestic economy."

In a statement, the Bank said it cut rates because of the weaker global economy, and the threat that posed to the UK economy.

"On balance, the outlook, although highly uncertain, is for aggregate demand and output growth to be weaker than previously projected," it said.

The Bank's move was also welcomed by the Confederation of British Industry (CBI), whose deputy director general John Cridland, said: "It was a hard call but it was the right one."

Confidence is crucial to the economy in its current fragile state, he added, and the Bank's decision sent out the right signals to industry.

What the cut does say to business people is that the Monetary Policy Committee understands the concerns they hav

John Cridland, Confederation of British Industry

"Nobody is suggesting that a quarter point cut will change the terms of trade in the short term.

"What it does say to business people, particularly exporters and manufacturers, is that the Monetary Policy Committee understands the concerns they have."

Figures released on Thursday show that, for the first time since December 1999, the majority of UK managers in manufacturing expect a fall in employment over the next six months.

Exporters also complain that their business is being hampered by the strong pound.

The Item Club, an influential economic think tank, recently argued that the Bank of England should intervene to push the pound down - something that a rate cut should help achieve.

Targeting inflation

Commenting on the Bank's move, John Butler, economist at HSBC, said: "We were shocked that they cut, but only because of comments from their last statement.

Neil Parker: concerns over cut

"They are concerned about the global outlook and are worried about seeing this feed through into domestic demand. They are taking the right pre-emptive measures so the UK has some growth this year."

But there is concern in some quarters that by attempting to stimulate growth, the Bank of England has gone beyond its remit of setting interest rates to ensure inflation remains at or near 2.5%.

Neil Parker, senor economist at the Royal Bank of Scotland, said: "There is a worry here that the Bank of England is setting monetary policy to try to balance the economy but in fact what they are doing is perhaps unbalancing it even more.

"Because we are going to see consumers and the housing market continue to grow very robustly and therefore manufacturers, while they will welcome the cut, might not get too much benefit from it particularly with sterling as strong as it is."

Figures released on Wednesday by the Confederation of British Industry (CBI) showed that retail sales surged in July, putting pressure on inflation.

UK annual inflation in June remained at a two-year high of 2.4%, just below the Bank of England's target.